Distribution businessIssue raised

DPI comment

All distribution businessesThe Distribution Network Service Providers (DNSPs) all note that they already have bushfire mitigation processes in place, and that there are enough incentives (e.g. insurance premiums, reputational risk) and obligations (e.g. Energy Safe Victoria (ESV) Bushfire Mitigation Plan/Safety case requirements, safety regulations) to reduce fire starts, without the need for an F-Factor scheme. Therefore the need for the F-Factor scheme has not been justified.Despite all the measures currently in place, the Victorian Bushfires Royal Commission concluded that [1]:
... the SWER and 22kV distribution networks constitute a high risk for bushfire ignition along with other risks posed by the ageing of parts of the networks and the particular limitations of SWER lines.
DPI accepts that there are obligations on DNSPs to reduce fire starts and the F-Factor scheme is intended to complement these obligations, in much the same way as the Service Target Performance Incentive Scheme (STPIS) complements equivalent obligations on the DNSPs around reliability of supply.
DPI also notes that expenditure allowances have been provided to the DNSPs to fund bushfire mitigation. However, DPI considers that there remains a risk that customers will pay more as a result of this funding but not receive a higher level of service. In this respect, the F-Factor operates in a similar way to the STPIS by helping to ensure that customers only pay more if a higher level of service has been delivered.
The Victorian Bushfires Royal Commission (VBRC) also noted in its final report that the S-Factor scheme (now succeeded by the STPIS) creates an incentive for DNSPs to focus expenditure on more populated areas. [2] The F-Factor scheme aims to address this by creating an incentive to also maintain the asset base in rural areas, and accordingly prevent fire starts. This is particularly important as assets age.
Most DNSPs are concerned about the integrity of historical data to be used in determining the targets of the F-Factor scheme. CP/PC suggested obtaining "fresh data".DPI considers that data quality should improve over time as more experience is gained with the operation of the scheme. In particular, the incentive scheme should help to improve data quality. Given that the initial data set is likely to have some limitations, DPI agrees that a low incentive rate should be set for the initial determination of the F-Factor scheme. DPI proposes that this rate be set at $25,000 for the first regulatory period (and subsequent periods, until such time as it is revised by the Australian Energy Regulator (AER)).
 
When the F-Factor commences, data will be collected from the DNSPs, but also from agencies such as the ESV, the Metropolitan Fire and Emergency Services Board (MFB), the Country Fire Authority (the CFA) and the Department of Sustainability and Environment (DSE). This will assist in creating a reliable set of historical fire start data for the next determination of targets for the F-Factor scheme.
Most DNSPs believe that the F-Factor scheme should either not apply to areas that are low bushfire risk, or should not apply to DNSPs who operate in a predominantly urban area.Fire risks need to be managed across all areas of Victoria, not just regional or rural areas, as this is consistent with an "all hazards" approach.
As the scheme is focused on the number of fire starts and not the impact of a fire, the scheme creates an incentive for DBs to focus on low risk areas (e.g. fires on nature strips). 
 Future determinations by the AER may take this issue into account and accordingly different incentive rates may apply in different geographical areas depending on the fire risk.
Most DNSPs are concerned that fires are often out of their control and are caused by environmental factors.DPI does not accept all fires are outside the control of the DNSPs. The presence of obligations on DNSPs around line clearance recognises that DNSPs have a role in minimising the start of fires. This is further reinforced by the funding that has been provided to DNSPs (through the distribution network pricing determination process) for fire mitigation. DPI does recognise that fires will be influenced by external non-controllable factors such as weather patterns. In some cases, weather patterns may benefit or adversely affect the DNSPs. As a result of these considerations, the incentive rate for the first determination of the F-Factor has been set at a low level for the first regulatory period. It is possible that the incentive may increase in the future as further experience is obtained with the operation of the scheme.
A customer willingness to pay study should be undertaken before the F-Factor is introduced.The National Electricity (Victoria) Act 2005(NEVA) contains a provision allowing for a customer willingness to pay study, however this is not to determine if the scheme should be implemented, but rather what incentive/penalty rate should apply.
 A customer willingness to pay study can be undertaken for the next period of the F-Factor, to determine whether the incentive/penalty rate should be increased. It should also be noted that a customer willingness to pay study was not undertaken prior to the introduction of the S-Factor.
 In response to the willingness to pay of customers in different areas, the Order in Council gives AER the discretion to set different incentive/penalty rates based on geography.
The F-Factor places the AER in a position of assessing the extent to which customers value fire mitigation (i.e. willingness to pay). As willingness to pay may be influenced by a customer's geography, would the AER set a different penalty rate for urban and rural areas? 
Most DNSPs would like existing processes to be used rather than imposing costs by creating more reporting obligations and further definitions for items ( for example, it has been suggested that the ESV's existing fire start report procedures and guideline be used).DPI believes that the current ESV existing definition is too narrow, and would not capture all fire starts. The DNSPs should already have reporting procedures in place to capture all fire starts as this is good practice and would also be necessary for insurance purposes
Most DBs consider that a modest incentive rate should be adopted given data quality limitations. See also comments on capping revenue increments/decrements below.DPI agrees with this statement, which is why the initial incentive/penalty rate is set at a low initial level.
General support for the incentive to apply on all days, rather than restricting the application to total fire ban days.DPI supports this statement.
Citipower/PowercorThe AER's STPIS is not an appropriate model upon which to base a scheme to incentivise reductions in fire-starts as the incremental investment required is significant and there may not be a clear link between expenditure and fire start reduction.The scheme provides an incentive to the DNSPs to innovate and provide low cost methods of preventing fire starts. As noted above, DPI considers that DNSPs have a degree of control over fires and fire mitigation.
DNSPs would need to be funded to improve performance.The F-Factor scheme is an incentive based scheme, not a cost for service scheme. To the extent that a DNSP delivers expenditure that reduces fires starts they will be rewarded for this under the incentive. This is in addition to the substantial funding that has already been provided for 2011-15 through the EDPR. 
A joint government/industry working group should be established to assist DPI fully investigate the scheme.While a joint government/industry working group has not been established, DNSPs have been consulted regarding the F-Factor through consultation papers and meetings. This is consistent with Government practice. 
Before imposing further requirements such as the F-Factor scheme, Government should assess the effectiveness of the activities that DNSPs have undertaken in response to the VBRC.The activities that the DNSPs have put in place in response to the VBRC should assist them in benefiting from the incentive rate in the F-Factor scheme. Further, any rewards that the DNSPs receive for delivery of bushfire mitigation will be over and above the substantial expenditure allowances provided in the EDPR. 
Jemena, United EnergyThe OIC should provide the DNSPs with an option to cap the revenue increment or decrement that a DNSP can receive under the scheme.As the incentive/penalty rate is already low, no cap is required.
JemenaIn order to administer the scheme there will be costs incurred by the DBs. As a result, in some cases where a positive pass through is available, DBs may not apply in order to avoid the administration costs.It is the responsibility of the DB to determine whether it is in their interests to apply for a positive pass through under the scheme.
Jemena noted in particular that the number of fires associated with their network assets is so small that the reward associated with improved performance would be so immaterial that there would be no incentive to apply for the positive pass through. 
 The incentive rate may be increased by the AER as part of future determinations, and as a result over time it may be more advantageous for the DB to apply for the positive pass through.
United EnergyUE is concerned that the scheme would create an incentive on DNSPs not to report fire starts.As discussed above, data provided by the DNSPs will be reconciled against dated provided by agencies including but not limited to ESV, MFESB, the CFA and DSE. This auditing process should help identify where DNSPs have provided inaccurate or misleading information regarding fire starts and accordingly the AER can serve a Regulatory Information Notice on DNSPs to request information. This is also a deterrent against poor reporting.
DPI recognises that the AER is likely to face some information asymmetries which limit its ability to challenge the data provided by the DNSPs. However, similar incentives to under-report already exist under the STPIS and these have been addressed through effective governance and auditing, as outlined above.

Page last updated: 09/06/17